Program of Assistance to Ukraine – IMF and Kiev Join Together in Bluff Effort

On March 11, the Executive Board of the International Monetary Fund (IMF) approved a four-year extended arrangement under the Extended Fund Facility for Ukraine. The previous tranche was accompanied by an agreement to reform the Ukrainian economy. This time it’s different. The new accord gives priority to outside funding as the reform plan has suffered a total collapse. Table 1 introduces to the core parameters of aid coming from external sources.

Table 1.

IMF program of Assistance to Ukraine, 2015-2018

2015

2016

2017

2018

Total aid, 2015-2018

Financial deficit of Ukraine

21,4

6,8

6,9

4,8

40,0

Identified Financing

International Monetary Fund

10,0

2,5

2,5

2,5

17,5

European Union

1,8

0,7

-

-

2,5

United States of America

2,0

-

-

-

2,0

Other bilateral arrangements

0,7

0,2

-

-

0,9

Debt operation

5,2

3,4

4,4

2,3

15,3

Financing Gap (External funding)

Reserve accumulation

10,8

3,9

6,3

6,7

27,7

Underlying BOP (balance of payments) gap

10,6

2,9

0,7

-1,9

12,3

These are the things worth to be mentioned:

1. Ukraine’s securities holders have to restructure the debt. They have to shoulder the main burden of Ukraine’s financial deficit.

2. The first year of the program is going to be the hardest - $21, 4 billion or 53, 5% of the total four-year extended arrangement.

3. The major part of financing is destined to boost the Ukraine’s international reserves, only around 30% will be spent to fill the state budget.

Now let’s start with the third point. Why does the International Monetary Fund focus so much on international reserves? The main goal is to accumulate reserves to enable Ukraine pay off its foreign debts. The money lenders plan to tackle the problem of final payment of the Ukraine’s debt after 2018. The talks about «reinvigorating economy» serve as a disguise for genuine purposes of International Monetary Fund’s assistance program. Ukraine's finance minister, Natalia Yaresko, admits the overall $40 billion package over the next four years may not be enough to restore the country to economic growth. Ukraine may need much more. Now let’s get to the second point. 2015 is the year of critical importance. All the efforts will go down the drain if the program is not launched by the middle of this year. Now we approach the first point. The Ukraine’s securities holders are to play the key role. The government of Ukraine and the International Monetary Fund rely on them. They have to restructure the debt in Eurobonds issued by Ukraine. According to the plans of the International Monetary Fund, the restructuring program is to be competed till the middle of 2015 to make Ukraine get $15, 3 billion in four years. Table 2 shows who are the leading owners of Ukraine’s bonds.

The correlation between the sum ($15, 3 billion) Ukraine expects to get from talks with its creditors in line with the International Monetary Fund’s restructuring program and the total sum of the debt ($21 billion) estimated in Ukraine’s bonds shows that the holders have to postpone the debt servicing for the period after 2018. The mission is unaccomplishable due to a number of reasons:

1. Russian Finance Minister Anton Siluanov said Russia will not be a part of restructuring program. The authors of the program knew it in advance and did not count on that. According to the rules of the International Monetary Fund, normally only private investors take part in restructuring programs (states can join on their own will). Thus, only around $18 billion are to be restructured. History can hardly offer any examples when revamping such a sum enabled a state to get $15, 3 billion in four years.

2. US Franklin Resources, an American holding company, is the largest holder of Ukraine’s bonds. According to different estimates, it has amassed from $7, 5 billion to $8, 5 billion in Ukraine’s debt. Media outlets have reported that the company has created a group of bond holders which owns around 50% of Ukraine’s debt to private lenders. All in all, here is what we have: a) the group has amassed around $9 billion of Ukraine’s debt with around the same amount of debt owned by other private bond holders. b) the lion’s share of debt within this group falls on Franklin Resources leaving only $2 billion out of its control. The conclusion – it has failed so far to reach the minimal consolidation of debt to private holders.

2. Franklin Resources company belongs to «financial vultures» which don’t restructure debts. They normally undermine the accords on restructuring reached with other investors. Then they demand 100% payments. There is no reason to expect Franklin Resources to change its rules this time. The debt will not be written off. At best the schedule of payments may be altered for the period after 2018. But what will Ukraine be like at that time? Franklin Resources is already facing difficulties. It usually buys out debt bonds at the lowest price. In case of Ukrainian bonds it fell prey to miscalculation. According to the Wall Street Journal, most of the Ukraine’s debt was purchased by Franklin Resources at prices above 80 while the prices of Ukraine’s benchmark bond fell to the level lower than 50 cents. To my mind, Franklin Resources can restructure the debt only by reducing interest payments. At best it can bring in around $1 billion in four year period of time.

The Ukraine’s debt restructuring program will not yield the expected $15, 3 billion. It means that Ukraine may not get the next $5 billion tranche and the whole program so much praised and publicized by the International Monetary Fund may become just another example of financial impracticable scheme. I do not exclude that in the second half of the year Washington would come up with another plan - a third version of credit agreement between the International Monetary Fund and Ukraine.